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Why Did Gasoline Inventories Rise in the Last Week of July?

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Gasoline production

Gasoline production increased from ~9.68 million barrels per day (or MMbpd) in the week ended July 24 to 9.98 MMbpd in the week ended July 31. Gasoline production averaged 9.858 MMbpd over the four weeks ended July 31. That’s ~5% higher than the ~9.34 MMbpd average over the corresponding period last year. Compared to the four weeks ended July 24, four-week average supplies increased ~0.3%.

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Gasoline demand

Gasoline demand increased from ~9.34 MMbpd in the week ended July 24 to ~9.69 MMbpd in the week ended July 31. Gasoline demand averaged 9.54 MMbpd over the four weeks ended July 31. It was 5.4% higher than the 9.054 MMbpd over the corresponding period last year. Compared to the four weeks ended July 24, the four-week average demand increased by 0.4%.

What does this imply?

As we saw above, production of 9.98 MMbpd exceeded demand of 9.69 MMbpd in the week ended July 31. Both demand and production increased by almost the same amount in the week ended July 31. So an inventory build would have followed. You should note that net trade flows also affect gasoline inventory movements.

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Gasoline consumption forecasts

According to the EIA’s (Energy Information Administration) July “Short-Term Energy Outlook” report released on July 7, gasoline consumption will increase by 170,000 barrels per day (or bpd), or 1.9%, in 2015 over 2014 levels.

According to the report, “The effects of employment growth and lower gasoline prices outweigh increases in vehicle fleet efficiency.” However, the STEO forecasts that consumption will fall by 0.2% in 2016 as a result of higher prices and a trend toward more efficient vehicles. The EIA will release its next STEO on August 11.

Increased long-term gasoline consumption would be bullish for gasoline prices in the long term. Assuming crude oil prices remain relatively subdued, this would be positive for refiners such as Marathon Petroleum (MPC), Phillips 66 (PSX), and Valero Energy (VLO). These companies make up 7% of the iShares U.S. Energy ETF (IYE). Increased consumption is also positive for midstream MLPs such as  MPLX LP (MPLX) if their refining parents decide to ramp up gasoline production due to higher prices. These MLPs’s revenues are driven by the volumes that they transport.

In the next part of this series, we’ll look at the latest trends in distillate inventories.

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